The British pound edged slightly lower against the dollar on Wednesday but remains on course for its strongest annual performance in eight years.
Despite those gains versus the greenback, sterling has underperformed against the euro in 2025 and is set to finish the year as the weakest major European currency. The pound was last down 0.2% against the dollar at $1.3436, though it is still up around 7.5% for the year — its biggest annual rise since a 9.5% surge in 2017.
By contrast, the euro, Swiss franc, Norwegian krone and Swedish krona have all advanced between 13% and 19% against the dollar this year. Against the euro, the pound slipped 0.1% on Wednesday and has fallen more than 5% in 2025 to 87.24 pence, marking its sharpest annual decline versus the single currency since 2020.
Fiscal worries cap gains
While sterling has benefited from a broadly weak dollar in 2025, sentiment in the second half of the year was weighed down by domestic political uncertainty, concerns over Britain’s public finances and sluggish economic growth. Currency markets were particularly focused on the Autumn budget, but November’s fiscal announcement passed without major disruption, easing some of the pressure that had built up around the pound.
Looking ahead, sterling’s performance in 2026 is likely to hinge on monetary policy decisions from the Bank of England. The central bank cut interest rates four times in 2025, including a move in December, although divisions remain within the Monetary Policy Committee. Policymakers have also signalled that the already cautious pace of easing could slow further.
Money markets are not fully pricing in another rate cut until June, with roughly 40 basis points of easing expected by the end of the year — suggesting about a 60% chance of a second cut.
Kevin Thozet, a member of the investment committee at Carmignac, said that with the budget now behind markets, a cooling economy, a softening labour market and persistently high bond yields should give the BoE room to continue lowering interest rates.
“The conundrum for the policymakers has eased at least for the short term,” he said.
